Csp Q31

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Selecting the Manager(s)

Sponsor's Fiduciary Responsibility

Back 1

- Ensure investment decisions are soundly based on the application of a systematic and informed decision-making process

Front 2

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Selecting the Manager(s)

Typical Steps of Selecting an Investment Manager

Back 2

1) Review investment firms
2) Send detailed questionnaire
3) Conduct Interviews
4) Final Evaluation
5) Post-selection activity
a) Review legal agreements
b) Cost and fees should be determined
c) Performance measurement date should be established

Front 3

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Selecting the Manager(s)

Desired attributes of the manager (reviewing firms/developing a universe of suitable mangers)

Back 3

1) Expertise in a specific asset class
2) An established investment team
3) Minimum level of assets under management
4) No significant issues involving the overall organization
5) Low portfolio turnover
6) Above median performance over the past 5 years
7) Below median performance volatility over the past 5 years
8) Reasonable fees

Front 4

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Selecting the Manager(s)

An asset-management approach to selecting managers is analogous to the following asset-management/security selection steps

Back 4

1) Universe determination
2) Idea generation/quantitative screens
3) Analysis of securities/fundamental analysis/triangulation
4) Security ranking and selection
5) Portfolio construction
6) Monitoring

Front 5

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Selecting the Manager(s)

Universe determination

Back 5

1) Systematically identify and screen for a specific type of manager
2) Use measurable metrics and intangible considerations to isolate style
3) Measurable metrics include
a) Manager's official database classification
b) Quantitative screening

Front 6

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Selecting the Manager(s)

Quantitative Screening Used To

Back 6

1) Verify manager classification
2) Identify managers with superior performance
a) In various market environments and over a full market cycle
b) And consistent results relative to an appropriate benchmark

Front 7

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Selecting the Manager(s)

Quantitative Screening Caveats/Pitfalls

Back 7

1) Subject to survivorship bias
2) Fail to provide fundamental information about:
a) The investment manager
b) The experience of the team
c) The team's length of time at the firm
d) The depth of firm resources
e) The ownership structure of the firm

Front 8

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Selecting the Manager(s)

Intangible Considerations used to Add or Delete a Manager for Consideration

Back 8

1) Their history with the selection team
2) Prior experience investing in the security
3) Industry knowledge
4) Screened well but lost several key investment professionals
5) Didn't screen well but organization recently added a new team

Front 9

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Selecting the Manager(s)

Those selected for consideration

Back 9

1) Send RFP
2) Conduct fundamental analysis
3) Conduct triangulation analysis
4) Conduct a quantitative analysis
5) Make a decision

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Selecting the Manager(s)

Fundamental Analysis

Back 10

- Conduct through on-site meetings to understand/observe
a) Physical setting
b) Corporate culture
c) Quality of personnel
d) Quality of interpersonal relations and communications

Front 11

QBS 31: 11 of 27
Plan Size and its Effects on Investment Implementation

Plan Size Affects the Following Items

Back 11

1) Risk distribution
2) Manager selection
3) How funds will be invested
a) Asset classes available
b) Separate vs. commingled accounts
4) Economies of scale

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Plan Size and its Effects on Investment Implementation

Plan Size and its Impact on Risk

Back 12

- Typical risks facing small plans
1) Less asset class diversification
2) Use of separate accounts leads toward active management concentration risk
- Typical risks facing large and super large plans
1) Lack of high-quality managers for needed asset classes
2) Balancing active management risk and avoiding low-quality managers

Front 13

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Plan Size and its Effects on Investment Implementation

Plan Size and Use of Separate and Commingled Funds

Back 13

1) Large plans typically use separate accounts
2) Small plans typically use commingled accounts

Front 14

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Plan Size and its Effects on Investment Implementation

Disadvantages of Active Management Concentration

Back 14

1) Potentially lower returns
2) Diverge from peer groups

Front 15

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Plan Size and its Effects on Investment Implementation

Disadvantages of customized accounts

Back 15

1) Require significant oversight
2) Implementation risks

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Plan Size and its Effects on Investment Implementation

Advantages of commingled accounts

Back 16

1) Many exist
2) Provide investment solutions
3) Can develop performance statistics
4) Facilitates cost-effective allocations
5) Access to high-quality managers

Front 17

QBS 31: 18 of 27
Plan Size and its Effects on Investment Implementation

Disadvantages of commingled funds

Back 17

1) Active management risk if have one manager
2) Must monitor the manager's:
a) Performance
b) Style consistency
c) Risk

Front 18

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Plan Size and its Effects on Investment Implementation

Typical Investment Costs

Back 18

1) Investment management
2) Custodial
3) Transaction costs
4) Administration

Front 19

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Plan Size and its Effects on Investment Implementation

Small Plans and Costs

Back 19

- Need economies of scale through commingling

Front 20

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Plan Size and its Effects on Investment Implementation

Triangulation Analysis

Back 20

- Compare and contrast stories from different manager sources
a) Competition
b) Existing and former clients
c) Suppliers

Front 21

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Plan Size and its Effects on Investment Implementation

Quantitative Analysis used to Identify Manager Weaknesses and Strengths

Back 21

1) Examine RFP data for
a) Returns-based attribution by sector and style
b) Factor attribution of returns
c) Factor attribution of risk
d) Returns-based analysis
2) Look for alpha consistency

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Plan Size and its Effects on Investment Implementation

Decision Making

Back 22

1) Involve several investment professionals and encourage debate
2) Standardize manager rating across asset class and subclass

Front 23

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Investment Management Process - Monitoring the Investment Performance

Methods of Measuring Investment Return

Back 23

1) Internal rate of return (dollar-weighted rate of return):
- Advantages
- Sponsor can determine if they are achieving actuarial assumption
- Disadvantages
- Ineffective for evaluating managers because reflects the timing effects
2) Time-weighted rate of return

Front 24

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Plan Size and its Effects on Investment Implementation

Advantages of separate accounts

Back 24

1) Access and fee scale to sophisticated managers
2) Can customize plan
3) Can customize tracking error targets
4) Specify risk parameters
5) Can develop performance statistcs

Front 25

QBS 31: 25 of 27
Investment Management Process - Monitoring the Investment Performance

Methods of Measuring Performance on a Risk-Adjusted Basis

Back 25

1) total variability in absolute terms, calculated as either
a) Standard deviation of periodic returns
b) Rank returns over a period and divide distribution into percentiles
2) Total variability in relative terms
3) Market-related variability
- State of the art method for adjusting risk is the capital asset pricing model (CAPM)

Front 26

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Investment Management Process - Monitoring the Investment Performance

CAPM Methodology

Back 26

- Linear regression model analyzes relationship between portfolio and market returns
- Subtract risk-free return from both the market and portfolio returns
- Intersection with the Y axis is the alpha value
- The second feature is the slope of the line, beta value
- 1st calculate the expected portfolio rate:
- R(Portfolio) = R(risk-free) + [R(market)-R(free)] x Beta
- Then compare to the actual rate of return

Front 27

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Investment Management Process - Monitoring the Investment Performance

Caveats of a Performance Measurement System

Back 27

1) Hastily chosen system can become a pointless exercise
2) System should fit objectives not the reverse
3) Measuring the process may alter it
4) Avoid over measurement to save time and money